Systematic Investment Plan- the Power of Compounding
Posted in Finance Articles, Total Reads: 5289
, Published on 27 June 2011
Ever since ages, the concern for people has been accumulating wealth which would be sufficient to lead a prosperous and healthy lifestyle. By gaining education and then by doing business or work, people look out for the best possible professions which would not only give them personal satisfaction but would also yield good returns in terms of money. Apart from earning from the regular place of employment, people also invest in diverse institutions, policies and systems like banks, shares, mutual funds etc which helps in appreciating the value of money. However, people are afraid to invest a lump sum amount for a long duration as it deprives them of liquid cash. Thus people prefer smaller investments for a smaller time period and for that there is one tool, which is simply known as a Systematic Investment Plan (SIP).
Systematic Investment Plan is a financial tool which enables people to invest a fixed pre-decided amount for a fixed period every month. However, since only a fixed amount is invested every month, the number of units that the investor gets is more when the price is low and gets fewer units which they’re priced high. SIP is a very useful tool as the investor is benefitted by the power of compounding, especially as it allows people to invest in small affordable amounts.
SIP can be beneficial for investors if they invest for a longer period of time as the power of compounding would yield higher returns even on smaller invested amounts. The benefit of compounding can be explained by a simple example as mentioned below.
Assume that Mr. A started investing at the age of 30 and regularly invests Rs.1000 per month. On the hand, the same amount is invested by Mr.B, who started investing when he reached the age of 35. By the time they attain the age of 60 years, Mr.A has a total of Rs.35 lakhs as compared to Mr.B's Rs.16 lakhs compounded at 12% per annum. Thus, a difference of only Rs.60,000 invested between the two, made a difference of Rs.14 lakhs at the end of the investment plan. This clearly reflects the effect of compounding. Hence, the longer the investment period, the better are the returns at the end of the investment period.
The most important advantage of SIP is that people would be more comfortable in investing smaller amounts regularly rather than blocking a huge sum as investments. The main goal of SIP is to give the investors an investment goal, which can be achieved by careful systematic and smaller investments in select equity-oriented mutual fund schemes having a consistent and higher returning performance. Thus, in the long run smaller investments would help people making a fortune.
Another major benefit of SIP is that people can redeem liquid cash by breaking the policies in case of an emergency. This benefits investors in having secure money available at their disposal whenever they require it for their use. As long as the policy is active, it helps the money grow and when the need arises, the investors can take out their money. With the advancements in technology, investments can also be made with post dated cheques using auto debit facilities provided to the people. This facility directly debits from the investors bank account and save him time. Thus, easy and small investments through SIP make it convenient for the people.
'Every drop makes an Ocean'.
In life, small efforts in the right direction help people in achieving their goals. Even in the field of business, smaller steps and decisions taken enable companies to build and become strong at every stage. For individuals, their minute efforts when accumulated over a long period of time in a single direction, makes them into a strong force. Similarly, when small amounts of money are invested in SIP's for wealth creation, it makes it into a fortune due to the power of compounding.
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